Senate Banking Committee proves Congress “feckless?”

The Acting Director of the Federal Housing Finance Agency (FHFA), designated to the position by President Obama in 2009, rebuffed attacks made by Democratic senators on the issue of mortgage principal reduction in a hearing today focused on barriers to a recovery in the housing market. Without an avenue in Congress to pass the necessary legislation (if it existed), it seems Democrats will continue to keep up their pressure on Edward DeMarco, director of the FHFA, the government regulator and overseer of mortgage giants Freddie Mac and Fannie Mae, despite his firm stance. Instead of needed reforms, much of the discussion today focused on a principal reduction and nitpicking the foreclosure error settlement agreement.

DeMarco determined that principal reduction would unnecessarily risk taxpayers and not serve as the most effective loss mitigation tool, a decision made more than a month ago after study and within the constraints of a congressional mandate. Democrats have consistently criticized him for that position and for not doing more to help underwater borrowers.

In the Senate Banking Committee today, DeMarco entered into tense exchanges with Senators Bob Menendez (D-NJ) and Jeff Merkley (D-OR) over his decision on principal reduction. Sen. Merkley cited an article in the American Bankeron how private banks have found principal reduction or forgiveness to be a cost-effective means of reducing mortgage payments and keeping underwater households in their homes. The senators ignored DeMarco’s attempt to highlight how the two situations are far from comparable.

Yet what is perhaps the most insidious aspect of this debate has been ignorance of much grander and more pressing issues at play, the future role of government sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, and the implementation of an agenda conducive to economic growth and a housing market recovery not yet seen.

Elizabeth Duke, a Governor on the Federal Reserve Board, and Director DeMarco agreed in their questioning that putting a plan in place to reform the GSEs would be a cue to market participants for what role they may play in the future. DeMarco agreed with Senator Richard Shelby (R-AL), “The sooner the better.”

It seems all too inevitable that Fannie and Freddie will have to be fundamentally transformed; American taxpayers are unwilling to bear the risk and the financial burden they have had to play to keep the two companies afloat for the past few years. The two companies also have a very basic problem. Human capital. People do not know if they will have a job in a couple years. The companies are losing individuals with esoteric knowledge of housing finance to private companies. Both Duke and DeMarco agreed that such a measure could significantly aid the housing market recovery. But as Senator Bob Corker noted, Congress has been “feckless.”